2014 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-30-2014

Robert Freedman v. Sumner Redstone

Precedential or Non-Precedential: Precedential

Docket No. 13-3372

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

______________

No. 13-3372

________________

ROBERT FREEDMAN,

Appellant

v.

SUMNER M. REDSTONE; PHILIPPE P. DAUMAN; 

THOMAS E. DOOLEY; GEORGE S. ABRAMS; 

ALAN C. GREENBERG; SHARI REDSTONE; 

FREDERIC V. SALERNO; BLYTHE J. MCGARVIE; 

CHARLES E. PHILLIPS, JR.; WILLIAM SCHWARTZ; 

ROBERT K. KRAFT; VIACOM, INC.

________________

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civ. No. 1-12-cv-01052)

District Judge: Honorable Sue L. Robinson

________________

Argued March 25, 2014
2

BEFORE: FUENTES, GREENBERG, and 

VAN ANTWERPEN, Circuit Judges

(Filed: May 30, 2014)

______________

Daniel E. Bacine, Esq.

Barrack, Rodos & Bacine

2001 Market Street

3300 Two Commerce Square

Philadelphia, PA 19103

A. Arnold Gershon, Esq. (Argued)

Barrack, Rodos & Bacine

425 Park Avenue

Suite 3100

New York, NY 10022

Brian E. Farnan, Esq.

Joseph J. Farnan, Jr., Esq.

Joseph J. Farnan, III, Esq.

Rosemary J. Piergiovanni, Esq.

Farnan Law

919 North Market Street, 12th Floor

Wilmington, DE 19801

 Counsel for Appellant

Jaculin Aaron, Esq.

Stuart J. Baskin, Esq. (Argued)

Shearman & Sterling
3

599 Lexington Avenue

New York, NY 10022

John P. DiTomo, Esq.

Jon Abramczyk, Esq.

Morris, Nichols, Arsht & Tunnell

1201 North Market Street

P.O. Box 1347

Wilmington, DE 19899

 

 Counsel for Appellees

______________

OPINION OF THE COURT

______________

GREENBERG, Circuit Judge.

I. INTRODUCTION

Between 2008 and 2011, Viacom Inc. paid three of its 

senior executives—Board chairman Sumner Redstone, President 

and CEO Philippe Dauman, and COO Thomas Dooley—more 

than $100 million in bonus or incentive compensation. 

Although the compensation exceeding $1 million paid by a 

corporation to senior executives is not typically a deductible 

business expense under federal tax law, a corporate taxpayer 

may deduct an executive’s otherwise nondeductible 

compensation over $1 million if an independent committee of 

the corporation’s board of directors approves the compensation 
4

on the basis of objective performance standards and the 

compensation is “approved by a majority of the vote in a 

separate shareholder vote” before the compensation is paid. In 

2007, a majority of Viacom’s voting shareholders approved such 

a plan with the intent to render the excess compensation paid by 

Viacom tax deductible (the “2007 Plan”). One shareholder, 

appellant Robert Freedman, now claims that Viacom’s Board of 

Directors (the “Board”) failed to comply with the terms of the 

2007 Plan. Freedman contends that, instead of using 

quantitative performance measures, the Board partially based its 

bonus awards on qualitative, subjective factors, thus destroying 

the basis for their tax deductibility. Freedman alleges that this 

misconduct caused the Board to award its executives more than 

$36 million of excess compensation. Freedman sued Viacom 

and all eleven members of its Board derivatively on behalf of 

Viacom for not complying with the 2007 Plan, and directly for 

allowing an allegedly invalid shareholder vote reauthorizing the 

2007 Plan in 2012. On defendants’ motion, the District Court 

dismissed both claims by order entered on July 16, 2013. See

Freedman v. Redstone, Civ. No. 12-1052-SLR, 2013 WL 

3753426 (D. Del. July 16, 2013). Freedman has appealed from 

that order but we will affirm. 

At the outset we summarize the issues involved in this 

case and set forth our conclusions. In a requirement familiar to 

corporate litigators, before bringing a derivative suit on behalf 

of a corporation a plaintiff must demand that the corporation’s 

board of directors bring the suit itself. If the plaintiff does not 

make such a demand, the suit may proceed only if the plaintiff 

shows why a demand would have been futile, either because the 

board was interested in the challenged transaction or because the 
5

board acted outside the protection of the business judgment rule 

in dealing with the matter in issue. As Freedman did not make a 

pre-suit demand or present sufficient allegations explaining why 

a demand would have been futile, the District Court correctly 

dismissed his derivative claim. 

Freedman on his direct claim contends that, as a 

condition for allowing certain executive compensation in excess 

of $1 million to be tax deductible, federal tax law requires that 

the compensation be awarded pursuant to a plan approved in a 

vote of all the shareholders, even those otherwise without voting 

rights, thus preempting to this limited extent Delaware law 

authorizing corporations to issue non-voting shares as Viacom 

has done. Because we find that federal tax law does not confer 

voting rights on shareholders not otherwise authorized to vote or 

affect long-settled Delaware corporation law which permits 

corporations to issue shares without voting rights, we conclude 

that Freedman has failed to state a direct claim on which relief 

may be granted. 

II. BACKGROUND

Viacom is a publicly traded entertainment corporation, 

incorporated in Delaware, with its principal place of business in 

New York, New York. Viacom’s Board of Directors has eleven 

members, all of whom are defendants in this case. During the 

2011 fiscal year, Viacom earned more than $2 billion, and 

returned a substantial portion of those profits to its stockholders 

through cash dividends and stock buyback programs. 
6

As we have indicated, Freedman’s allegations center on 

the award of millions of dollars of incentive compensation to 

three Viacom executives. We reiterate that typically executive 

compensation exceeding $1 million is not tax deductible, but 

that 26 U.S.C. § 162(m) provides an exception to the rule of 

nondeductibility where the corporation pays the compensation as 

a reward for performance measured by established, objective 

criteria and an independent compensation committee of the 

corporation’s directors administers the compensation plan. 26 

U.S.C. § 162(m)(4)(C)(i); 26 C.F.R. § 1.162-27(e)(2)(i). In 

order for compensation paid pursuant to the exception to qualify 

for the favorable tax treatment, the taxpayer must disclose to its 

shareholders its plan to award such compensation and the plan 

must be “approved by a majority of the vote in a separate 

shareholder vote.” 26 U.S.C. § 162(m)(4)(C)(ii). 

On May 30, 2007, Viacom’s shareholders approved this 

type of plan—the Senior Executive Short-Term Incentive Plan. 

The 2007 Plan capped the awards, limiting each executive’s 

eligibility for awards to the lesser of either eight times his salary 

or $51.2 million per year. As these bonuses vastly exceeded § 

162(m)’s $1 million threshold, to ensure that the awards were 

tax deductible the 2007 Plan included provisions tying bonus 

awards to the achievement of specific, objective goals relating to 

Viacom’s financial performance. The plan directed the 

Compensation Committee of Viacom’s Board to establish a 

performance period, designate which executives would 

participate, select which performance goals to use from a list 

included in the 2007 Plan, and set a performance target within 

each goal. At the end of the performance period, the Committee 

was to certify “whether the performance targets have been 
7

achieved in the manner required by Section 162(m).” A. 63. If 

the targets were satisfied, then the executives earned the award, 

although the Committee could, “in its sole discretion, reduce the 

amount of any Award to reflect” its assessment of a particular 

executive’s “individual performance or for any other reason.” 

A. 63-64. 

The Committee selected several performance measures 

from the 2007 Plan and then set a range of performance goals 

for each measure. Each executive was eligible to receive a 

bonus of different amounts, depending on where on the range 

Viacom’s performance ultimately fell. Each executive was 

assigned a “target” bonus and, depending on Viacom’s actual 

performance, an executive’s bonus could be anywhere from 

25% to 200% of the target. Because the Committee selected 

more than one performance measure, the Committee weighted 

each measure and then combined the weighted percentage with 

Viacom’s performance to calculate each executive’s award. 

According to Freedman, the Committee failed to comply 

with the foregoing procedure. He contends that, in addition to 

the objective performance measures drawn from the 2007 Plan, 

“the Committee also used subjective, non-financial qualitative 

factors to determine approximately 20% of the bonus awarded to 

each Officer,” and “wrongfully arrogated to itself the positive 

discretion to provide additional compensation based on the 

accomplishments of each executive in a particular year.” A. 41-

42. The Committee allegedly used “positive discretion” to 

increase the executives’ bonuses, resulting in an “excess” award 

of $36,645,750. A. 42-47. 
8

The complaint quantifies the difference between the 

“earned” bonus and the actual bonus for each executive in each 

of the three years at issue (2008, 2009, and 2010). For example, 

in 2008 the Committee set Dauman’s “target bonus” at $9.5 

million (significantly less than the maximum bonus awards 

authorized by the 2007 Plan). The Committee selected two 

performance goals: Operating Income, weighted at 34%, and 

Free Cash Flow, weighted at 29%. It also assigned 20% weight 

to qualitative factors. 

The Committee then used these weighted factors—all of which 

were satisfied—to reduce Dauman’s actual bonus to $7,885,000 

(83% of the target). Freedman argues that the 20% of the 

ultimate award attributable to qualitative factors was improper, 

and thus Dauman received $1.9 million in excess compensation. 

A. 42-43. Freedman characterizes this metric as a violation of 

both the 2007 Plan and 26 U.S.C. § 162(m), and calculates the 

total amount of excess compensation awarded to the three 

executives to be $36 million. 

Treasury Regulations require corporations to obtain 

stockholder approval of executive compensation plans every 

five years, 26 C.F.R. § 1.162-27(e)(4)(vi), and Viacom thus 

sought stockholder approval of its compensation plan in 2012 

(the “2012 Plan”). Viacom’s certificate of incorporation 

established two classes of stock: Class A shares, which have one 

vote per share, and Class B shares, which are not “entitled to any

votes upon any questions presented” to Viacom’s stockholders. 

A. 156 (Certificate of Incorporation). Because Redstone owns 

79.5% of Class A shares and obviously favored adoption of the 

plan, Freedman reasonably contends that the passage of the 2012
9

Plan was guaranteed “no matter what the other stockholders 

wanted.”1 A. 50. On March 8, 2012, the Class A shareholders 

voted to approve the 2012 Plan. 

On August 17, 2012, in response to the adoption and 

implementation of the plan, Freedman filed a complaint in the 

District of Delaware against all eleven Board members and 

Viacom, asserting both a derivative and a direct claim. The 

derivative claim alleged that the Board wrongfully authorized 

the payment of excessive compensation. Freedman contended 

that this authorization was an act of disloyalty and waste, and 

unjustly enriched the recipients of the compensation. Therefore, 

in Freedman’s view, the authorization was not the product of a 

valid exercise of business judgment. The direct claim asserted 

that the shareholder vote on the 2012 Plan violated 26 U.S.C. § 

162(m) because Class B shareholders could not participate in the 

vote. Freedman reads § 162(m) as requiring that all

shareholders be eligible to vote on plans to award tax-deductible 

compensation, thus, to that limited extent, preempting Delaware 

law which permits corporations to issue non-voting shares. 

Under this reading, Viacom, by excluding Class B shareholders 

 

1 Redstone also owns a large block of Class B shares but that 

point is immaterial.

2 Freedman contends that the District Court also had federal 

question and supplemental jurisdiction, see 28 U.S.C. §§ 1331, 

1340, and 1367, but we need not address this possibility.

3

The five independent directors are current and former members 

of the Compensation Committee. The five directors who are not 

independent include the three executives receiving the 

compensation at issue (Redstone, Dauman, and Dooley), as well 
10

from the shareholder vote, did not satisfy federal law insofar as 

the vote was intended to render the excess compensation tax 

deductible. Freedman sought more than $36 million in 

damages, injunctive relief preventing enforcement of the 2012 

Plan, and a new vote—that would include Class B 

shareholders—to approve or reject the 2012 Plan. 

Defendants moved to dismiss the complaint under 

Federal Rule of Civil Procedure 23.1 because Freedman had not 

made a pre-suit demand on the Board, and under Rule 12(b)(6) 

because his complaint failed to state a valid claim. On July 16, 

2013, the District Court granted defendants’ motion to dismiss. 

Freedman, 2013 WL 3753426, at *11. The Court concluded that 

Freedman had failed to show that pre-suit demand on Viacom 

would have been futile, and had not sufficiently alleged facts 

that created a reasonable doubt that the Board took its 

challenged actions after its valid exercise of business judgment. 

Therefore, the Court dismissed the derivative claim. In 

dismissing Freedman’s direct claim, the Court rejected 

Freedman’s argument that 26 U.S.C. § 162(m) preempted 

Delaware corporation law with respect to shareholder approval 

of the compensation plan. Freedman has appealed from both 

aspects of the July 16, 2013 order. 

III. JURISDICTION AND STANDARD OF REVIEW

 The District Court had diversity of citizenship 

jurisdiction over Freedman’s state law claims under 18 U.S.C. § 
11

1332(a)(1), and we have jurisdiction under 28 U.S.C. § 1291.2 

We review a district court’s ruling on demand futility for abuse 

of discretion. Kanter v. Barella, 489 F.3d 170, 175 (3d Cir. 

2007). But to the extent that a party challenges the legal 

precepts employed by a district court, we apply plenary review. 

Blasband v. Rales, 971 F.2d 1034, 1040 (3d Cir. 1992). We also 

apply plenary review to the District Court’s dismissal of 

Freedman’s complaint under Federal Rule of Civil Procedure 

12(b)(6). See Jones v. ABN Amro Mortg. Grp., Inc., 606 F.3d 

119, 123 (3d Cir. 2010). We accept all of Freedman’s factual 

allegations in the complaint as true and construe the complaint 

in the light most favorable to him. Id. In making our 

determination, we may consider “‘an indisputably authentic 

document that a defendant attaches as an exhibit to a motion to 

dismiss if the plaintiff’s claims are based on the document.’” 

Steinhard Grp. Inc. v. Citicorp., 126 F.3d 144, 145 (3d Cir. 

1997) (quoting Pension Benefit Guar. Corp. v. White Consol. 

Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)); see also In re 

Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d 

Cir. 1997) (explaining that courts may rely on documents 

extrinsic to the complaint on which the complaint is based). 

Like the District Court, we therefore consider the 2007 Plan, 

Viacom’s 2012 proxy statement, and Viacom’s certificate of 

incorporation. 

 

2 Freedman contends that the District Court also had federal 

question and supplemental jurisdiction, see 28 U.S.C. §§ 1331, 

1340, and 1367, but we need not address this possibility.
12

IV. DISCUSSION

We reiterate that Freedman’s complaint alleged both a 

derivative and a direct claim and we agree with the District 

Court’s order dismissing both claims. First, the derivative claim 

fails because Freedman did not meet the requirements to excuse 

him from making a demand on the Board to bring the action on 

the theory that it would have been futile to make the demand. In 

this regard, Freedman did not comply with Rule 23.1, which 

requires plaintiffs to plead with particularity their efforts to 

obtain the desired action from the directors or the reasons for 

not obtaining the action or making the effort to obtain that 

action. Inasmuch as the complaint did not set forth any such 

facts, the requirement that Freedman make a demand was not 

excused. Second, the Court properly dismissed the direct claim 

under Rule 12(b)(6) because the claim failed to state a cause of 

action. 

A. Freedman’s Derivative Claim 

As we have indicated, before bringing a derivative suit, a 

shareholder must make a pre-suit demand on the company’s 

board of directors to give the board an opportunity to bring the 

suit on behalf of the corporation. In re Merck & Co., Sec., 

Derivative & ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007); 

see also Fed. R. Civ. P. 23.1(b)(3) (requiring derivative 

complaints to “state with particularity” any attempted demand or 

the reasons for not making the demand, i.e. why a demand 

would have been futile); Del. Ch. Ct. R. 23.1 (same). Although 

Federal Rule of Civil Procedure 23.1 provides the procedural 

vehicle for addressing the adequacy of a derivative plaintiff’s 
13

pleadings, “[t]he substantive requirements of demand are a 

matter of state law.” Blasband, 971 F.2d at 1047-48. The 

decision whether to bring a lawsuit is “a decision concerning the 

management of the corporation and consequently is the 

responsibility of the directors.” Id. at 1048 (citing Levine v. 

Smith, 591 A.2d 194, 200 (Del. 1991)). Because a derivative 

suit potentially could intrude into the sphere of managerial 

control, the demand requirement balances the interest of 

shareholders in pursuing valid claims against the interests of the 

board in managing the corporation. Id. 

But a court may excuse a plaintiff from satisfying the presuit demand requirement if the demand would have been futile 

because the board could not make an independent decision on 

the question of whether to bring the suit. In general, “directors 

are entitled to a presumption that they were faithful to their 

fiduciary duties,” and the putative plaintiff bears the burden of 

overcoming this presumption. Beam ex. rel. Martha Stewart 

Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048-49 

(Del. 2004) (emphasis omitted); see also Levine, 591 A.2d at 

205-06. To meet that burden under Delaware law, a complaint 

must include particularized facts creating reasonable doubt 

either that (1) “the directors are disinterested and independent,” 

or that (2) “the challenged transaction was otherwise the product 

of a valid exercise of business judgment.” Aronson v. Lewis, 

473 A.2d 805, 814 (Del. 1984). “[I]f either prong is satisfied, 

demand is excused.” Brehm v. Eisner, 746 A.2d 244, 256 (Del. 

2000). 

1. Interest and Independence of Viacom’s Board 
14

As we set forth at the outset, Viacom’s Board of 

Directors has eleven members, and all are defendants and 

appellees in this case. The parties agree that five of the directors 

are independent, and that five are not.3 Accordingly, to the 

extent that the case turns on the independence of the Viacom 

Board of Directors, the critical question is whether the eleventh 

director, Alan Greenberg, was independent. Viacom classified 

Greenberg as an independent director under its Corporate 

Governance Guidelines and the NASDAQ listing standards. 

However, the complaint alleges that Greenberg is not 

independent because he “is a long-time close personal friend and

an adviser to Sumner Redstone.” A. 48 (Complaint ¶ 49). 

Freedman supports this allegation by citing In re Viacom Inc. 

Shareholder Derivative Litigation, No. 602527/05, 2006 N.Y. 

Misc. LEXIS 2891, at *10-12 (Sup. Ct. June 26, 2006) (In re: 

Viacom), in which a New York judge determined that the 

plaintiffs’ complaint contained allegations sufficient to create a 

reasonable doubt that Greenberg was interested in the 

transaction at issue.4 Freedman argues that this 2006 New York 

 

3

The five independent directors are current and former members 

of the Compensation Committee. The five directors who are not 

independent include the three executives receiving the 

compensation at issue (Redstone, Dauman, and Dooley), as well 

as Redstone’s daughter, Shari Redstone, and George Abrams. 

We do not focus on the distinction between the Board as a 

whole and the Compensation Committee as Freedman does not 

contend that either body usurped a function of the other. 

4

In re: Viacom has a subsequent case history but we need not 

discuss it as it is not material to our result. See In re: Viacom, 
15

Supreme Court case conclusively decided that Greenberg is not 

independent, and that appellees thus are precluded from 

relitigating his independence under the doctrine of collateral 

estoppel. 

Collateral estoppel bars relitigation where “the identical 

issue necessarily [was] decided in the prior action and [is] 

decisive of the present action,” and “the party to be precluded 

from relitigating the issue . . . had a full and fair opportunity to 

contest the prior determination.” Kaufman v. Eli Lilly & Co., 

482 N.E.2d 63, 67 (N.Y. 1985).5 The party, in this case 

Freedman, asserting that another party is collaterally estopped 

on a particular point has the burden of demonstrating that the 

issue on which he contends that other party is estopped was 

raised in the prior proceeding and was identical to the issue in 

the present proceeding.6 Howard v. Stature Elec., Inc., 986 

 

No. M-6074, 2006 N.Y. App. Div. LEXIS 14718 (N.Y. App. 

Div. Nov. 30, 2006).

5

The law of the state of the issuing court—here, New York 

law—determines the preclusive effects of a judgment. 

Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 145 (3d Cir. 

1999). 

6

Freedman attempts to shift the burden on the issue to 

appellees. He incorrectly claims that a prior determination “is 

preclusive in the second case, unless there is an affirmative 

showing of changed circumstances.” Appellant’s br. at 13. The 

New York Court of Appeals, in assessing whether a prior 

determination that directors were independent precluded 
16

N.E.2d 911, 914 (N.Y. 2013). In demand futility cases, a prior 

ruling on a director’s independence does not necessarily apply in 

a future proceeding addressing the same topic.7 See Bansbach 

v. Zinn, 801 N.E.2d 395, 402 (N.Y. 2003) (explaining that prior 

ruling on directors’ independence in demand futility context did 

not apply “for all time and in all circumstances”). A 

determination of a director’s independence thus is concerned 

with a possibly fluid relationship and, accordingly, differs from 

the determination of a fixed historical fact in the first litigation 

such as a determination of which automobile went through a red 

light in an automobile accident case.

We find that Freedman has failed to carry his burden to 

show that the issue here is identical with the issue that the New 

York Supreme Court decided in In re: Viacom. In re: Viacom

 

plaintiffs from claiming they were not independent, placed the 

burden on the party asserting that collateral estoppel was 

applicable to show the identity of the issues in the successive 

litigation and did not automatically assume that the result in the 

prior case was preclusive in the latter case. Bansbach v. Zinn, 

801 N.E.2d 395, 402 (N.Y. 2003). We thus will decline 

Freedman’s invitation to overturn the long-settled principle that 

the party asserting collateral estoppel must show the identity of 

issues in order to invoke it. See, e.g., Kaufman, 482 N.E.2d at 

67 (“The party seeking the benefit of collateral estoppel has the 

burden of demonstrating the identity of the issues....”). 

7

In his brief, Freedman indicates that “[t]he sole basis for 

Greenberg’s alleged lack of independence is issue preclusion.” 

Appellant’s br. at 21.
17

was a derivative action that various shareholders brought in 

2006 against Viacom’s Board of Directors. The plaintiffs in that 

case alleged that the Board breached its fiduciary duty by 

approving excessive compensation packages—totaling more 

than $159 million in one year—to three Viacom executives, 

including Redstone. 2006 N.Y. Misc. LEXIS 2891, at *2, *6-7. 

Greenberg was one of the Board members approving the 

compensation. The complaint alleged that Greenberg had a 

“long-standing close business and personal relationship with 

Redstone,” id. at *10 (internal quotation marks omitted), and, as 

Redstone’s personal investment banker, that Greenberg directly 

advised him on two large acquisitions in 1993 and 1994 and on 

the unwinding of one acquisition in 2004. Id. at *11. Based on 

these facts—that Greenberg had “advised Redstone in his 

personal affairs in two large acquisitions, provided services and 

continues to provide services to Viacom”—the court concluded 

that plaintiffs had advanced a reasonable claim that Greenberg 

was interested in the transaction. Id. at *11-12. The court 

explained that the financial benefits Greenberg had received or 

potentially would receive as a result of his relationship with 

Redstone created an impermissible “taint of interest.” Id. at *12. 

But the issues here are not identical with those that the 

court considered in In re: Viacom. First, unlike the complaint in 

In re: Viacom, Freedman’s complaint does not include any 

allegations regarding specific transactions in which Greenberg 

participated, and does not claim that Greenberg had received or 

in the future could receive financial benefits from Redstone that 

could taint his independent view of the executive compensation 

package at issue. Second, seven years elapsed between the 
18

filing of the In re: Viacom complaint in 2005 and the filing of 

Freedman’s complaint in this case in 2012. Because 

“[i]ndependence is a fact-specific inquiry made in the context of 

a particular case,” Beam, 845 A.2d at 1049, as well as at a

particular time, it would be inappropriate to adopt Freedman’s 

suggestion that we assume that the relationship between 

Redstone and Greenberg has remained static for seven years. 

See Restatement (Second) of Judgments § 27 (cmt. c) (noting 

that, in some cases, “the separation in time and other factors 

negat[e] any similarity [so] that the first judgment may properly 

be given no effect”). 

Rather, as appellees point out, In re: Viacom relied on 

Greenberg’s involvement through a firm with which he was 

associated, Bear Stearns, in specific transactions involving 

Viacom and Redstone personally in the 1990s and early 2000s. 

But by 2012, Bear Stearns no longer existed, and Greenberg had 

become a non-executive officer at JPMorgan Chase, the firm 

that acquired Bear Stearns. JPMorgan Chase’s business 

dealings with Viacom are limited, and there are no allegations in 

the complaint that Greenberg has been involved in any specific 

transactions with Redstone or Viacom, or that he continues to be 

Redstone’s investment banker. See Appellees’ br. at 24; A. 83 

(2012 Proxy Statement) (explaining Greenberg’s role at 

JPMorgan and that transactions with Viacom account for less 

than 1% of JPMorgan’s revenues). The complaint does not 

contain any specific allegations suggesting that Redstone and 

Greenberg continue to have a relationship conveying what the 

court in In re: Viacom called the “taint of interest.” 

Indeed, this case is indistinguishable from Bansbach v. 
19

Zinn, in which the New York Court of Appeals would not apply 

collateral estoppel where the party asserting it “merely rel[ied] 

on the proof they put before the court in” an earlier proceeding, 

but did “nothing to substantiate their claims” in the current 

proceeding. 801 N.E.2d at 402. Absent concrete allegations 

regarding the relationship between Redstone and Greenberg that 

suggest some financial benefit or control—like those presented 

in In re: Viacom—Freedman has not carried his burden to show 

the identity of the issues in the two cases, and thus collateral 

estoppel does not apply. As collateral estoppel with respect to 

Greenberg’s independence is the only ground on which 

Freedman challenges the Board’s independence, the District 

Court correctly held that demand was not excused on the basis 

of the application of that doctrine. See Freedman, 2013 WL 

3753426, at *8. We therefore turn to the second prong of the 

demand futility test. 

2. Exercise of Valid Business Judgment

Because Freedman failed to prove that the Viacom Board 

of Directors was not independent, he “must carry the ‘heavy 

burden’ of showing that the well-pleaded allegations in the 

complaint create a reasonable doubt that its decisions were ‘the 

product of a valid exercise of business judgment.’” White v. 

Panic, 783 A.2d 543, 551 (Del. 2001) (quoting Aronson, 473 

A.2d at 814). The business judgment rule protects corporate 

managers from judicial interference with their informed, good 

faith business decisions. When considering corporate litigation, 

courts presume that the business judgment rule applies so that 

unless a plaintiff presents evidence to the contrary, the court 

assumes that “the directors of a corporation acted on an 
20

informed basis, in good faith and in the honest belief that the 

action taken was in the best interests of the company.” Levine, 

591 A.2d at 207 (internal quotation marks and citation omitted), 

overruled on other grounds by Brehm, 746 A.2d 244. A 

plaintiff bears a particularly heavy burden to overcome this 

presumption where, as here, a majority of independent, nonmanagement directors approved the transaction. Id.; see also

Grobow v. Perot, 539 A.2d 180, 190 (Del. 1988) (explaining 

that plaintiff bears a “heavy burden” to avoid pre-suit demand 

where majority of independent, disinterested directors approved 

transaction), overruled on other grounds by Brehm, 746 A.2d 

244. The business judgment rule protects an independent 

board’s compensation decisions, even those approving large 

compensation packages. See Brehm, 746 A.2d at 262 n.56; 

Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996) (“If an 

independent and informed board, acting in good faith, 

determines that the services of a particular individual warrant 

large amounts of money . . . the board has made a business 

judgment.”). 

Freedman argues that the Compensation Committee’s

actions fall outside the protection of the business judgment rule 

because its actions violated the terms of the 2007 Plan. 

Specifically, Freedman contends that the Committee used 

subjective factors to calculate the short-term compensation 

awards, thereby contravening the express terms of the 2007 Plan 

and rendering the excess compensation not tax deductible. 

Freedman correctly notes that in certain circumstances 

transactions that violate stockholder-approved plans may not be 

protected by the business judgment rule and thus the presence of 

those circumstances may excuse a plaintiff’s failure to make 
21

demand on the board. See, e.g., Ryan v. Gifford, 918 A.2d 341, 

354 (Del. Ch. 2006) (“A board’s knowing and intentional 

decision to exceed the shareholders’ grant of express (but 

limited) authority raises doubt regarding whether such decision 

is a valid exercise of business judgment and is sufficient to 

excuse a failure to make demand.”); see also Weiss v. Swanson, 

948 A.2d 433, 441 (Del. Ch. 2008) (explaining that business 

judgment rule attaches only where board’s grant of stock options 

adheres to stockholder-approved plan). 

Key to these cases, however—and missing from 

Freedman’s complaint—are particularized allegations regarding 

violations of a stockholder-approved plan. In Ryan, for 

example, the plaintiff provided “specific grants, specific 

language in option plans, specific public disclosures, and 

supporting empirical analysis to allege knowing and purposeful 

violations of shareholder plans and intentionally fraudulent 

public disclosures.” 918 A.2d at 355. Freedman’s allegations, 

by contrast, do not provide “sufficient particularity” to survive a 

motion to dismiss. See Ryan, 918 A.2d at 355. 

The 2007 Plan directed the Compensation Committee to 

establish performance targets from a list of objective measures, 

and, if those targets were met, authorized the Committee to 

award the maximum amount—the lesser of $51.2 million or 

eight times the executive’s base salary. The 2007 Plan 

authorized the Committee “in its sole discretion, [to] reduce the 

amount of any Award to reflect the Committee’s assessment of 

the [executive’s] individual performance or for any other 

reason.” A. 64. Because the objective performance targets were 

met in all of the years at issue, the Committee was authorized to 
22

award the maximum amount provided in the Plan (the lesser of 

$51.2 million or eight times base salary), or to adjust this 

amount downward and award less. According to both the 2012 

Proxy Statement and appellees, the Committee did use 

subjective factors in determining each executive’s 

compensation, but only to adjust the award downward, which 

both the 2007 Plan and 26 U.S.C. § 162(m) permitted. 

Freedman argues that the Committee used subjective 

discretion to adjust the awards upward, and that we should 

discard any claim that appellees make to the contrary because 

the basis for appellees’ claim “comes only from [their] briefs.” 

Appellant’s br. at 25. Freedman is mistaken. According to the 

plain terms of the 2007 Plan, the only limitations on short-term 

executive compensation are that (1) it only may be awarded 

based on objective performance targets established by the 

Compensation Committee; (2) if the target is not met, 

compensation may not be awarded; and (3) if the target is met, 

the award may not exceed the maximum authorized amounts. 

The allegations in the complaint do not suggest that any of these 

provisions were violated, and the 2012 proxy statement supports 

appellees’ position that the Compensation Committee followed 

the terms of the Plan in awarding short-term compensation. 

Moreover, to the extent that the Compensation 

Committee did use subjective factors to calculate the amount of 

executive compensation awarded, Freedman has failed to 

explain why the Committee is not entitled to the protection of 

the business judgment rule. As discussed above, the 2007 Plan 

authorizes the Committee to use subjective factors in calculating 

compensation. In general, “a board’s decision on executive 
23

compensation is entitled to great deference,” and “the size and 

structure of executive compensation are inherently matters of 

judgment.” Brehm, 746 A.2d at 263. And the Delaware 

Supreme Court has held that a board does not have the duty to 

preserve tax deductibility under § 162(m) when awarding 

executive compensation. See Freedman v. Adams, 58 A.3d 414, 

417 (Del. 2013) (“The decision to sacrifice some tax savings in 

order to retain flexibility in compensation decisions is a classic 

exercise of business judgment.”). 

Although Freedman may disagree with the Board’s 

decision to award Viacom’s executives substantial short-term 

incentive compensation, the Board, acting through the 

Compensation Committee, did not exceed its powers under 

Delaware law, and we may not second guess its exercise of its 

business judgment in this matter. Freedman was obligated to 

make a pre-suit demand. Because he failed to do so, the District 

Court properly dismissed his derivative claim under Rule 23.1. 

B. Freedman’s Direct Claim

Freedman also alleged that the vote to approve the 2012 

Plan was invalid because it did not include Class B shareholders.

According to Freedman, 26 U.S.C. § 162(m) gives all 

stockholders a “binding vote” on performance-based incentive 

compensation plans. Appellant’s reply br. at 11. He asserts that 

Viacom violated this provision by failing to include all 

shareholders in the vote on the 2012 Plan. We find Freedman’s 

argument to be without merit: § 162(m) does not create 

shareholder voting rights, nor does it preempt long-established 

Delaware corporate law allowing corporations to issue non-
24

voting shares. Freedman purchased only non-voting shares; he 

cannot now use federal tax law as a backdoor through which he 

may pass to obtain rights that as a shareholder he does not 

possess. 

First, and most fundamentally, 26 U.S.C. § 162(m) does 

not provide any voting rights to stockholders. The provision is 

one subsection of a tax code provision listing the items that a 

taxpayer may deduct as business expenses but specifying that 

certain employee compensation exceeding $1 million is not tax 

deductible. This restriction on deductibility does not apply to 

qualified performance-based compensation, where “the material 

terms under which the remuneration is to be paid, including the 

performance goals, are disclosed to shareholders and approved 

by a majority of the vote in a separate shareholder vote.” 26 

U.S.C. § 162(m)(4)(C)(i)-(ii); see also 26 C.F.R. § 1.162-

27(e)(4)(i). Contrary to Freedman’s assertions, § 162(m) does 

not mention voting rights or the mechanics of shareholder 

voting, or include any language that even hints that Congress 

intended to require that a corporation provide for voting rights 

of any kind. Given this fact, Freedman has an uphill climb to 

show that Congress intended both to require that corporations 

grant shareholders certain voting rights, and to do so by 

displacing Delaware corporate law. 

Delaware law presents an obstacle to Freedman’s attempt 

to obtain a judicial result that non-voting shares be allowed to 

vote. Delaware law expressly grants corporations the right to 

issue stock with limitations, including limitations on voting 

rights. See Del. Stat. Ann. tit. 8 § 151(a) (“Every corporation 

may issue 1 or more classes of stock . . . which . . . may have 
25

such voting powers, full or limited, or no voting powers . . . .”); 

see also Lehrman v. Cohen, 222 A.2d 800, 806-07 (Del. 1966) 

(explaining that § 151(a) permits flexibility in stockholders’ 

rights, and confers express authority to issue non-voting stock). 

In a provision consistent with this authority, Viacom’s 

certificate of incorporation provides for two types of shares, 

Class A and Class B. Each share of Class A stock is entitled to 

one vote, but the holders of Class B stock are not “entitled to 

any votes upon any questions presented to stockholders.” A. 

156. Therefore, Viacom was exercising its authority under 

Delaware law when it issued non-voting shares and, as a 

consequence, excluded the shareholders holding those shares 

from voting on the 2012 Plan. 

Freedman argues that federal tax law preempts Delaware 

law with respect to corporate votes but federal law does no such 

thing. There are, broadly speaking, three types of preemption: 

express preemption, field preemption, and implied conflict 

preemption. Hillsborough Cnty., Fla., v. Automated Med. 

Labs., Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 2375 (1985). 

The Supreme Court directs us to two “cornerstones” in our 

preemption analysis: first, “the purpose of Congress is the 

ultimate touchstone in every preemption case,” and, second, we 

must presume that Congress did not intend to preempt state law 

absent evidence of a “clear and manifest” intention to do so. 

Wyeth v. Levine, 555 U.S. 555, 565, 129 S.Ct. 1187, 1194-95 

(2009) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 

S.Ct. 2240, 2250 (1996)). This presumption against preemption 

is heightened in areas traditionally occupied by the states, such 

as corporate law, “including the authority to define the voting 

rights of shareholders.” CTS Corp. v. Dynamics Corp. of Am., 
26

481 U.S. 69, 89, 107 S.Ct. 1637, 1649 (1987); see also

Armstrong World Indus., Inc. by Wolfson v. Adams, 961 F.2d 

405, 418 (3d Cir. 1992) (acknowledging the “states’ prerogative 

to define shareholder rights”). Given that corporate law is an 

“area of traditional state regulation,” Freedman has a difficult 

task when he attempts to show preemption absent evidence of 

Congress’s “clear and manifest” intent to supersede state law. 

See Bates v. Dow Agrosciences LLC, 544 U.S. 431, 449, 125

S.Ct. 1788, 1801 (2005).

As we discussed above, there is nothing in § 162(m)—

language, structure, or otherwise—suggesting that Congress 

intended to confer voting rights on non-voting shares by 

preempting state corporate law that permitted the issuance of

non-voting shares. Indeed, § 162(m) is concerned only with the 

tax status of various business expenses, and does not implicate 

corporate structure or governance. Nonetheless, Freedman 

argues that § 162(m) preempts Delaware law under two separate 

theories: (1) Congress has occupied the field, and (2) the federal 

and Delaware laws conflict, making it impossible for a 

corporation to comply with both. Neither argument has merit. 

With respect to his first theory, field preemption, 

Freedman notes that “the Internal Revenue Code has occupied 

the field of federal taxation.” Appellant’s br. at 34. That 

occupation, however, as expansive as it may be, does not 

include the field of corporate governance and shareholder rights, 

matters only tangentially related to tax questions.8 After all, the 

 

8We have no need in this opinion to refer to even a small sample 

of the circumstances in which the application of federal tax law 
27

Supreme Court consistently has reiterated that corporate law, 

including governance and shareholder rights, is a field 

traditionally left to the states. See, e.g., CTS Corp., 481 U.S. at 

89, 107 S.Ct. at 1649; Burks v. Lasker, 441 U.S. 471, 478, 99 

S.Ct. 1831, 1837 (1979). Indeed, when we faced a preemption 

challenge based on the body of federal law most analogous to 

corporate law—securities laws—we rejected a field preemption 

argument because not even all the “federal securities laws taken 

together occupy the field of corporate law.” Green v. Fund 

Asset Mgmt., L.P., 245 F.3d 214, 222 n.7 (3d Cir. 2001). We 

thus cannot find field preemption in this case. 

Freedman’s second theory, conflict preemption, fares no 

better. Conflict preemption allows federal law to override state 

law if it is impossible for a person to comply with both federal 

and state law, or if “state law erects an obstacle to the 

accomplishment and execution of the full purposes and 

objectives of Congress.” Farina v. Nokia Inc., 625 F.3d 97, 115 

(3d Cir. 2010) (quoting Hillsborough Cnty., 471 U.S. at 713, 

105 S.Ct. at 2375). Freedman contends that the latter situation 

applies here: in his view, the purpose of § 162(m) is to 

enfranchise all shareholders—even those holding non-voting 

shares—to vote on excess executive compensation, and thus § 

162(m) conflicts with Delaware’s law granting corporations 

permission to issue non-voting shares.9 

 

depends on rights established by state law.

9

Freedman thinks this case illustrates the effect of the conflict. 

Redstone controls the Class A voting shares, and this control 
28

Freedman points to one piece of legislative history to 

support his argument. The House of Representatives 

Conference Report discussing the Federal Omnibus Tax Bill 

explains that compensation exceeding $1 million only can be 

deducted if the terms of the plan authorizing the compensation 

were disclosed to shareholders and “approved by a majority of 

shares voting in a separate vote.” H.R. Conf. Rep. No. 103-213, 

1993 WL 302291, at *587 (1993). We fail to grasp how this 

report can be taken as evidence that Congress intended to 

enfranchise non-voting shareholders as the explanation merely 

addresses the need for the approval of the “majority of shares 

voting” to authorize compensation exceeding $1 million but 

does so without making reference to the shares that can vote. It 

seems clear that the more natural reading of the congressional 

report is that the reference to “shares voting” means “voting 

shares;” it strains credulity to read this report to suggest that 

Congress intended to displace longstanding state corporate 

law.10 

 

guaranteed that the 2012 Plan would be adopted as he favored 

the plan. Freedman claims this circumstance is at odds with 

Congress’s intent to provide all shareholders with a say over 

how executive compensation is awarded. Yet if a single 

shareholder controlled a majority of all of the shares of a 

corporation and all the shares had equal voting rights, then 

Congress would have allowed that shareholder to decide the 

issue individually. 

10 Even if this passage did aid Freedman’s case, we would 

hesitate to rely on legislative history given that the language of § 
29

Freedman’s other basis to support his claim of conflict 

preemption is that the regulations associated with other tax 

provisions, concerning incentive stock options and employee 

stock purchase plans, expressly mention “voting stock” when 

discussing shareholder approval. See 26 C.F.R. § 1.422-3(a) 

(“By a majority of the votes cast at a duly held stockholders’ 

meeting at which a quorum representing a majority of all 

outstanding voting stock is, either in person or by proxy, present 

and voting on the plan . . . .”); 26 C.F.R. § 1.423-2(c)(1)(i) 

(same). Given that Congress thus “understood the difference 

between ‘stock’ and ‘voting stock,’” appellant’s br. at 35, 

Freedman reads the absence of this language in § 162(m) as an 

indication that Congress meant for non-voting stockholders to 

have a vote. 

Again, Freedman’s argument misses the mark. First, he 

does not cite the prefatory language to 26 C.F.R. §§ 1.422-3, 

1.423-2(c)(1) which provides: “If the applicable State law does 

not prescribe a method and degree of stockholder approval . . . .” 

26 C.F.R. §§ 1.422-3(a), 1.423-2(c)(1). Contrary to Freedman’s 

contentions, these regulations emphasize that Congress did not 

intend the federal tax code to displace existing state law, and 

that Congress intended to supplement state law if—and only 

if—state law had not provided a mechanism for approving a 

particular plan. Second, it is hard to see how the omission of a 

particular phrase in implementing regulations indicates a “clear 

 

162(m) unambiguously fails to provide the rights that he claims. 

“Where the statutory language is unambiguous, the court should 

not consider statutory purpose or legislative history.” In re 

Phila. Newspapers, LLC., 599 F.3d 298, 304 (3d Cir. 2010). 
30

and manifest” intent to include something in statutory language. 

The connection is far too tenuous to overcome the presumption 

against preemption. 

Rather than displaying a “clear and manifest intention” to 

displace state law, all evidence—the unambiguous statutory 

language, as well as the legislative history and regulatory 

language offered by Freedman—indicates that Congress did not 

intend § 162(m) to confer voting rights on non-voting 

shareholders or that it even considered that possibility. In our 

view, as is often the case, the most straightforward way to read 

legislation is correct: § 162(m) is nothing more than what it 

purports to be—a statute providing corporations with a 

mechanism by which certain otherwise excess nondeductible 

executive compensation over $1 million may become tax 

deductible. It does not provide voting rights to stockholders 

holding non-voting shares, it does not override Viacom’s 

certificate of incorporation, and it does not supersede decades of 

established Delaware law. Accordingly, we do not conclude 

that Congress has preempted Delaware Corporation law and we 

therefore hold that the District Court properly dismissed 

Freedman’s direct claim.11

 

11 We note that Freedman does not assert that the Internal 

Revenue Service did not allow Viacom to deduct all of the 

compensation it paid to the executives. Though we place only 

limited significance on this circumstance, the amount of 

compensation paid the executives was so large that it well may 

have come to the IRS’s attention. See Lexington Nat’l Ins. 

Corp. v. Ranger Ins. Co., 326 F.3d 416, 420 (3d Cir. 2003). Yet 
31

V. CONCLUSION

For the foregoing reasons, we find that the District Court 

correctly dismissed Freedman’s derivative claim because he 

failed to make a pre-suit demand on Viacom’s Board of 

Directors, and properly dismissed Freedman’s direct claim as his 

complaint did not state a cause of action. We thus will affirm 

the District Court’s order of July 16, 2013. 

 

so far as we are aware, the IRS did not challenge the 

compensation’s deductibility.